Housing Affordability Rises in Third Quarter

WASHINGTON – Housing affordability conditions improved in the third quarter, largely the result of a decline in mortgage interest rates, according to the National Association of Realtors®.

NAR's composite Housing Affordability Index was 135.3 during the third quarter, up 2.9 percentage points from 132.4 reported in the second quarter; it was 2.2 points higher than the same period a year earlier when it stood at 133.1.

The index shows that the typical household had 135.3 percent of the income needed to purchase a home at the third quarter median existing-home price, which was $161,800. This index measures affordability factors for all home buyers making a 20 percent downpayment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home. The third-quarter median family income was estimated to be $52,689.

David Lereah, NAR's chief economist, said the improvement results from a favorable change in interest rates, which are the biggest variable in housing affordability. "The sustained drop in mortgage interest rates, along with a modest improvement in household income, more than offset higher home prices in the third quarter," he said. "This means a typical family could afford a bigger home or find it a little easier to qualify to buy their first home." A median-income household could afford a home costing $218,900.

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 6.41 percent during the third quarter, down from 6.82 percent in the second quarter; it was 7.06 percent in the third quarter of 2001. This is a weighed average interest rate between fixed and adjustable loans, including the cost of points, and represents a bottom-line mortgage cost.

NAR President Martin Edwards Jr. said first-time buyers lag repeat buyers in purchasing power. "Although it's never been easy to buy your first house, the lowest interest rates since the 1960s mean opportunities exist," he said. "Still, entry-level buyers often have to lower their sights in terms of their starter home, but the important thing is to get started to build equity for the future." Edwards is a partner in Colliers Wilkinson & Snowden Inc., Memphis, Tenn.

Affordability for first-time home buyers rose 1.6 percentage points in the third quarter to an index of 78.5 from a reading of 76.9 in the second quarter; it was 0.7 percentage point above the third quarter 2001 index of 77.8.

The association's First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an income of $29,943, had 78.5 percent of the income needed to purchase a typical starter home with a 10 percent downpayment. The median starter home price was $137,500, during the third quarter.

The index shows a typical entry-level buyer can afford a home costing $107,900. "In more expensive markets, this means a condo or townhouse may be a more attractive option given the typically higher cost of single-family homes," Edwards said. "In many cases buyers are willing to make a longer commute to own a home, but it's important for first-time buyers to learn about programs targeted to their needs before making any decisions."